The infrastructure program will continue to underpin growth. The rail line linking Djibouti and Addis-Ababa, nearing completion, will be operational in 2017. The Port of Doraleh (an extension to the Port of Djibouti) will open in 2017. The oil pipeline between the country and Ethiopian is also progressing, in so far as the first investment sum was decided in September 2016 by an American company. Following an agreement between China and Djibouti in January 2016, the planned Djibouti Silk Road Station, a free-trade zone financed by Chinese investments echoing the One Belt One Road project, will strengthen the trading position of Djibouti in the medium term. Other projects, a number of which are being considered, include the construction of a drinking water pipeline, together with Ethiopia, airports, a wind power farm, a solar energy facility with Germany, and a geothermal facility with China. In addition, as China is the main source of funding for recent public investment projects, the finance for certain projects is conditional on the state of the Chinese economy. The country is facing a number of major development challenges. Despite its sustained growth, a proportion of the population continues to live in extreme poverty and 22% of the active population was unemployed in 2015. Job creations chiefly benefited expatriate workers, as the local workforce lacks sufficient skills. Informal economy accounts for a significant percentage of economic activity. In addition, agriculture remains an underdeveloped sector, because of the harshness of the climate. The economy remains highly dependent on the port activity, with more than 80% of the port traffic coming from Ethiopia, which does not have a seaboard. The deterioration of the economies and the security situations within Djibouti’s leading economic partners (Yemen, Somalia and Ethiopia) represents a short-term risk for the country’s economy. In addition, an increasing number of people is fleeing the conflict in Yemen and seeking refuge in Djibouti. Inflation is likely to rise slightly as investment spending feeds through into housing and basic services but remain limited because of the strength of the Djibouti franc, pegged to the dollar as part of a currency board arrangement.

Because of the level of public spending and the narrowness of the tax base, the country has a structural budget deficit. This also applies for the current account deficit, which has been constantly growing as imports of capital goods rise, and this despite the regular growth in exports, essentially consisting of port services. The beginning of a slowdown in capital goods imports, as a number of the projects reach completion, and the continued vitality of services exports will help to reduce the current account deficit slightly in 2017. Public investments financed by non-concessional loans contracted with China (60% of GDP in 2016) have worsened the degree of vulnerability of the debt. In this context, the debt burden will become harder and harder to bear, raising concerns about its sustainability.

Internally, the president, Ismaël Omar Guelleh, re-elected for five year in the elections in April 2016, has ruled the country with a firm hand since 1999. The opposition appears weak, because of its fragmentation and the repression to which it has been subjected. The involvement of the Head of State in the corruption scandals is likely to tarnish his image, particularly abroad. The business climate remains difficult (high cost of production, poor contract fulfilment, bureaucratic burden, limited access to credit). This is not likely however to call into question the support for the country from western governments, thanks to its strategic position in the region. Djibouti is likely to remain a regional linchpin in the fight against terrorism and piracy because of its nearness to Somalia, Yemen and the Gulf of Aden. The country hosts a number of Western (namely US and French) and Asian military bases. China has plans to set up a naval base in 2017. In response to this, Japan, which also has a base in Djibouti, wants to increase its military presence, as a counterweight to Chinese influence in the country. The Japanese and Djiboutian governments are negotiating the leasing of additional land, which could become a reality in 2017. Saudi Arabia is also holding discussions with the government about a military presence in Djibouti.